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We begin by noting that section 1041 does not provide for
the exclusion of income; it provides for the nonrecognition of
gain or loss under the circumstances described therein. As in
the case of other nonrecognition sections, the Federal income tax
consequences of a transaction described in section 1041 are
deferred. Also similar to other nonrecognition sections, the tax
deferral is effectuated through the treatment of the basis of the
property involved in the underlying transaction. Sec. 1041(b).
For a discussion of the background, purpose, and scope of section
1041, see Balding v. Commissioner, supra at 370-372.
Petitioner relies upon Balding in support of her position
regarding the application of section 1041. In Balding, we held
that payments received over a 3-year period by the taxpayer in
settlement of her claim to her former husband's military
retirement benefits were subject to nonrecognition treatment
under section 1041. Petitioner argues that because the payments
in Balding were spread out over 3 years, a portion of each
payment must have included unstated interest that the taxpayer
was not required to include in her income. Because we disagree
with petitioner's presumption that unstated interest was involved
in Balding, we find no support in that case for her section 1041
argument. There is nothing in Balding that suggests that
interest was involved, or that interest paid to a spouse or
former spouse in connection with the division of marital property
incident to a divorce would be subject to section 1041.
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